Identifying the ‘Hidden Assets’ of Your Business

Maximize Purchase Price by Identifying Hidden Assets

An important step in evaluating a business for sale is identifying its hidden assets. The most common hidden assets of a business are personal expenses of the owner classified as business expenses and the owner’s salary. These expenses are in fact part of the ‘adjusted owner benefit’ of the business because they are of economic benefit to the owner and would not be incurred by the buyer of the business.  Other hidden assets of a business are licenses, franchise rights, and leasehold rights that may not be readily observable. Identifying hidden asset is a crucial component of properly valuing and selling a business.

Hidden Assets as Profit Centers

  • Hidden assets include personal expenses of the owner as well as salary expenses for the owner or the owner’s family that are counted as regular business expenses in the financial statement (such as a tax return or profit and loss statement).
  • The reason that such expenses are actually profit centers is because the buyer of the business will not incur those same expenses.
  • Rather those expenses simply serve as profit centers for the owner.
  • For example, an owner’s salary is counted as an expense in the tax return.
  • But is it really an expense? In reality, the owner’s salary is a profit to the owner.
  • After all, he or she is paying themselves this money.
  • Likewise, if an owner’s spouse or family members are paid salaries, then one must include such salaries as owner benefit so long as the salaries exceed the fair market salaries for the work actually performed by such family members.
  • All personal expenses (such as health insurance costs, auto expenses, or travel expenses) that are actually for the benefit of the owner should be similarly treated as a part of the owner’s profits (or owner benefit).
  • Other costs on a tax return such as non-cash expenses (depreciation), non-recurring expenses (the cost to cover a legal settlement), and expenses for the owner’s personal line of credit are in reality costs that would not be borne by the buyer of a business.
  • These too count as a part of the adjusted owner benefit.
  • Many people are initially confused by this concept, but a good business broker must thoroughly go through the financials in order to uncover all of these hidden profit centers.

Licenses May be Hidden Assets

Some businesses posses valuable government licenses which are extremely costly and difficult to obtain. For example, government licenses held by healthcare companies greatly increase their valuation. The application process and costs involved for many South Florida healthcare companies when getting licensed by AHCA (Agency for Health Care Administration) can be lengthy and quite expensive. The value of such a license must be accurately reflected in the business valuation. Generally, the value of a government license is a function of its scarcity value, costs incurred to establish the license, and the time involved in waiting to receive the license.

Pawn Shops Licenses

As with healthcare companies, pawn shops have very valuable licenses. What is the value of a pawn shop license if the city in which the pawn shop is located does not issue any more pawn shop licenses? Many cities and municipalities impose moratoriums on issuing new pawn shop licenses. This creates tremendous value for pre-existing pawn shop licenses which may be transferred to a buyer. Such a hidden asset necessitate qualitative judgments on what the fair market value is for the license in the local jurisdiction.

Franchise Territory Rights

Hidden assets can sometimes include franchise rights or the contractual right of a franchisee to conduct business under the name of a franchisor for a set period of time. Franchise rights may be quite valuable especially if the franchisor is successful and growing by adding more franchised locations.  This situation presents a great opportunity for a buyer because of all the untapped potential of the franchised territory. This type of asset may be hidden from many buyers who are unaware of the financial success and opportunity for growth within a franchise.

Leasehold Rights

A leasehold right is the right of a commercial tenant to occupy and use leased commercial space. This right is memorialized in a commercial lease, which is typically transferred to a buyer as a contingency of the deal. A long term lease with below market rent while situated in a desirable location (especially for retail-related businesses) is an excellent hidden asset. Further, if a long term lease protects the tenant from future competitors within the same plaza, then the lease is even more valuable.

A business must be closely scrutinized to understand all of the company’s hidden assets. All facets of the company’s operations – including its leasehold rights, franchise rights, and licenses – must be analyzed along with the financial statement in order to uncover the true value of the business.

Give Martin at Five Star Business Brokers a call today and let’s discuss the hidden assets of your business so that you can maximize the purchase price when it comes time to sell your business.